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VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES

12 Months Ended

Dec. 31, 2020

VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES

VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES

NOTE 6—VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES

Variable Interest Entities—Ground Lease

The Company determined it has a variable interest through its ground lease at its Beachwood, Ohio property (The Vue Apartments) and the owner/operator is a VIE because its equity investment at risk is insufficient to finance its activities without additional subordinated financial support. The Company further determined that it is not the primary beneficiary of this VIE because the Company does not have power over the activities that most significantly impact the owner/operator’s economic performance and therefore, does not consolidate this VIE for financial statement purposes.

Accordingly, the Company accounts for this investment as land and the revenues from the ground lease as Rental income, net. Ground lease rental income amounted to $729,000, $1,597,000, and $3,357,000 during 2020, 2019 and 2018, respectively. Included in these amounts is rental income of $814,000 and $1,964,000 during 2019 and 2018, respectively, from previously held VIE properties located in Wheaton and Lakemoor, Illinois, which were sold in August 2019 and September 2018, respectively (see Note 5).

As of December 31, 2020, the VIE’s maximum exposure to loss was $13,901,000 which represented the carrying amount of the land. Simultaneously with the closing of the acquisition, the owner/operator obtained a mortgage for $67,444,000 from a third party which, together with the Company’s purchase of the land, provided substantially all of the funds to acquire the complex. The Company provided its land as collateral for the owner/operator’s mortgage loan; accordingly, the land position is subordinated to the mortgage. The mortgage balance was $67,162,000 as of December 31, 2020. No other financial support has been provided by the Company to the owner/operator as of December 31, 2020. In November 2020, the ground lease was amended to require, among other things, that the owner/operator deposit $1,200,000 to pay certain past due operating expenses and a portion of anticipated future operating cash flow shortfalls at the property as well as $170,300 to pay a portion of the cost of near-term capital expenditures required at the property (all of which sums have been deposited). The Company has agreed, in its discretion, to fund 78% of (i) any further operating expense shortfalls at the property after the initial operating expense deposit has been fully utilized, and (ii) any capital expenditures required at the property. The Company did not fund any such amounts as of December 31, 2020. Through March 4, 2021, the Company funded $409,000.

Variable Interest Entities—Consolidated Joint Ventures

The Company has determined that the four consolidated joint ventures in which it holds between a 90% to 95% interest are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights. The Company has determined it is the primary beneficiary of these VIEs as it has the power to direct the activities that most significantly impact each joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits. Accordingly, the Company consolidates the operations of these VIEs for financial statement purposes. The VIEs’ creditors do not have recourse to the assets of the Company other than those held by the applicable joint venture.

NOTE 6—VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES (Continued)

The following is a summary of the consolidated VIEs’ carrying amounts and classification in the Company’s consolidated balance sheets, none of which are restricted (amounts in thousands):


	December 31,
	2020		2019
Land	$	12,158	$	12,158
Buildings and improvements, net of accumulated depreciation of $5,232 and $4,334, respectively		23,372		24,223
Cash		1,102		888
Unbilled rent receivable		861		859
Unamortized intangible lease assets, net		627		745
Escrow, deposits and other assets and receivables		1,089		1,204
Mortgages payable, net of unamortized deferred financing costs of $253 and $313, respectively		23,530		24,199
Accrued expenses and other liabilities		752		562
Unamortized intangible lease liabilities, net		526		591
Accumulated other comprehensive loss		(127)		(65)
Non-controlling interests in consolidated joint ventures		1,193		1,221

As of December 31, 2020 and 2019, MCB Real Estate, LLC and its affiliates (‘‘MCB’’) are the Company’s joint venture partner in three consolidated joint ventures in which the Company has aggregate equity investments of approximately $7,495,000 and $7,941,000, respectively.

Distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro rata to the equity interest each partner has in the applicable venture.